Google Goes Public

Published: August 20, 2004

After a series of missteps, Google finally pulled off its much-hyped initial public offering yesterday. The good news about this unusual I.P.O., which sought to deprive Wall Street banks of full control over the sale, is that it made it easier for individual investors to buy the stock. Of course, that may also be the bad news. At its closing price of just above $100 yesterday, Google is valued at a bubbly $27 billion.

The co-founders of the Google search engine, Sergey Brin and Larry Page, got very rich yesterday, and deservedly so. This Internet icon that raised $1.67 billion yesterday by selling only a small percentage of its shares didn't even exist six years ago. Now its very name is part of the information age lexicon, as people talk about ''Googling'' someone.

And unlike some of the dot-com-bubble darlings that famously turned to Wall Street to raise cash merely to burn it, Google is a profitable enterprise. But one worth more than $27 billion? Only time will tell if the company can fend off efforts by Yahoo and Microsoft to build superior search engines.

Google still exudes that unabashed Silicon Valley anti-establishment attitude, the kind that made 1999 such fun for a lot of young techies. Nowhere was that more apparent than in the way it sought to dictate to Wall Street the terms of its own sale, as opposed to the other way around. This is a commendable impulse -- I.P.O.'s have generally been structured to benefit insiders.

Google's execution, however, wasn't pretty. The company seemed to think that it was unnecessary to explain its business model and its plans to skeptical investors. There were flaws and delays in its registration process, and a Playboy interview by Messrs. Brin and Page that has drawn the ire of the Securities and Exchange Commission, which objects to having information appear in Playboy that's not in a company's prospectus.

Just days ago, the company's executives, bankers and venture capitalists were playing the blame game over a last-minute repricing from 25.7 million shares at up to $135 a share -- which would have made Google worth more than General Motors -- to 19.6 million shares at $85 apiece, which made it roughly equivalent to G.M.

These gaffes are lamentable because they may give pause to other companies contemplating the ''Dutch auction'' method that Google relied on, which has plenty to commend it.

The idea behind this type of I.P.O. is to allow online bidders to determine a stock's offering price, thereby zeroing in on that sweet spot where supply equals demand. By setting a real price that would be less susceptible to manipulation, Google wanted to democratize the process and diminish the hegemony of the investment banks.

The Dutch auction is also a plus for corporate issuers in the short run because it raises the maximum amount of cash possible, rather than offering discounted shares.

By contrast, in a conventional I.P.O., investment banks underwrite the stock and decide on the offering price. That price is set at an artificially low level as an incentive for investors -- often insiders' clients, friends and families -- to participate in what is generally an unproven enterprise. The big potential winners are the initial investors, and the biggest potential losers -- as the bubble so amply demonstrated -- are the subsequent investors.

In the end, the Google offering was a hybrid. The company had to lower its offering price to $85 in the face of a deteriorating stock market and the skepticism of institutional investors.

The move avoided sticking to a price that would have seemed too high from the outset. Google's opening day of trading was orderly: its stock rose more than 18 percent, only a modest pop by the standards of the dot-com bubble. This type of I.P.O., in addition to being more democratic, could presumably be more manageable for companies that are easier to value.

As for Google shareholders, they can be satisfied that the I.P.O., in the end, went smoothly. Now all they have to worry about is whether the scrappy Internet search engine is really worth $27 billion.